Planning Responses to Big Market Moves

The practical point: Planning your crash response in February (calm) prevents panic paralysis in March (S&P -34%)—you've already decided what to do, you just execute.

Why Pre-Planning Market Responses Matters

February 2020: Markets calm, S&P at all-time highs. You have $20,000 cash reserves. You think: "If market crashes, I'll buy the dip—stay disciplined, take advantage of fear."

March 2020: S&P crashes -34% in five weeks (fastest since 1929). Your portfolio is down -28%. Your heart is racing. News saturated with COVID deaths, economic shutdown, hospital overflow. You open your brokerage to "buy the dip" as planned.

You freeze. "Should I buy now? What if it drops more? What if this is 2008 all over again?" Decision paralysis. You close the app. $20,000 stays in cash earning 0.5%. S&P recovers +70% by year-end. Opportunity cost: $12,300.

The problem wasn't lack of courage—it was lack of pre-commitment plan. "I'll buy the dip" is a wish, not a plan. (Gollwitzer & Sheeran, 2006, pp. 69–119) show implementation intentions ("If X occurs, then I will do Y") increase goal achievement by 2–3x vs. vague goals. Mechanism: Pre-commitment removes in-the-moment decision-making—decision made in cold state (calm, rational), executed in hot state (emotional, volatile) without re-deciding.

The durable lesson: Implementation intentions ("If S&P drops >20%, I will buy $10k VTSAX") work because they remove the hardest part of investing—making rational decisions when your amygdala is screaming.

What Pre-Commitment Planning Is (and Isn't)

Definition

Pre-commitment plan: Written response to specific market scenarios, created in calm state (before volatility), executed mechanically in volatile state (when emotions would otherwise paralyze or override rational thinking).

Implementation intention format: "If S&P drops >20%, then I will buy $10,000 VTSAX"

Examples:

• Crash buying: "If S&P drops >20% from recent peak, I will deploy $10,000 cash into VTSAX within 48 hours"
• Exit rule: "If Meta declines >25% from purchase price AND revenue growth <10% for two consecutive quarters, I will sell 50% of position"
• Rebalancing trigger: "If any asset class drifts >5 percentage points from target allocation, I will rebalance within 30 days"

Critical distinction: Specific vs. vague

• Vague (fails under pressure): "I'll buy the dip when it feels right" / "I'll sell if fundamentals deteriorate"
• Specific (executes mechanically): "If S&P hits 2,709 (-20% from 3,386 peak), buy $10,000 VTSAX" / "If Meta <$262 AND Q2 revenue growth <10%, sell 50%"

(Thaler & Benartzi, 2004, pp. S164–S187) show pre-commitment mechanisms succeed when decisions are made in "cold state" (calm, rational) and executed in "hot state" (emotional, volatile). Save More Tomorrow: employees commit to future savings increases while calm (not feeling loss), autopilot executes during paycheck (no re-decision). Market application: plan rebalancing triggers in calm ("If allocation drifts >5%, rebalance"), execute in volatility (no emotion override).

(if you don't have a written crash buying plan with specific S&P levels and dollar amounts, you have a wish, not a plan)

How Pre-Commitment Prevents Decision Paralysis

Mechanism 1: Removes In-the-Moment Decision-Making

Without pre-commitment (March 2020 crash):

• S&P down -34%, portfolio -28%
• Decision required: "Should I buy? How much? At what price? What if it drops more?"
• Cognitive load: 4+ decisions under extreme stress
• Result: Decision paralysis (too many unknowns, fear dominates) = inaction

With pre-commitment (plan written February 2020):

• S&P hits 2,370 (-30% trigger from pre-set plan)
• Decision required: None—plan says "Deploy $10,000 at -30%"
• Cognitive load: Zero (already decided in calm state)
• Result: Execute trade mechanically within 48 hours

(Kahneman & Tversky, 1979, pp. 263–291) show decisions under uncertainty differ systematically from decisions in calm—people become risk-averse after gains (lock in profits prematurely) and risk-seeking after losses (double down to recover). Pre-commitment mechanisms remove this distortion: decision made in calm state, executed in volatile state without re-deciding.

(the phrase 'I'll buy the dip' is not a plan—it's a rationalization you'll abandon when the dip arrives)

Mechanism 2: Converts Vague Intention to Automatic Behavior

(Gollwitzer & Sheeran, 2006, pp. 69–119): Implementation intentions increase goal achievement by 2–3x.

Vague goal: "I'll rebalance when my allocation drifts too much"

• Execution rate: ~30% (requires noticing drift + overcoming inertia + deciding "now is the time")

Implementation intention: "If allocation drifts >5 percentage points from target, I will rebalance within 30 days"

• Execution rate: ~80% (trigger is objective, action is predetermined)

Why it works: The "If X, then Y" format creates automatic response—when X occurs (trigger), Y executes without deliberation. Financial application: When S&P hits -20% trigger, you don't re-decide whether to buy—you execute the $10,000 purchase per plan.

Mechanism 3: Mitigates Disposition Effect (Holding Losers Too Long)

(Odean, 1998, pp. 1775–1798): Investors without pre-set sell rules hold losing positions 124% longer than winners. Disposition effect: sell winners too early (lock in small gains), hold losers too long (hope to "get back to even").

Exit rules reduce this bias by 40%—pre-commitment triggers (e.g., "Sell 50% if position down >25%") override emotional attachment to cost basis.

Example: Hold Meta at $350, drops to $240 (-31%). Without exit rule: "I've lost $11,000, can't sell until back to even" (sunk cost bias + disposition effect = hold indefinitely). With exit rule: "If Meta <$262.50 (-25%) AND fundamentals deteriorate, sell 50%" (triggers at $240 with revenue <10% growth = execute sale, no emotion override).

(exit rules feel unnecessary during bull markets ('I'll know when to sell')—but that's precisely when you need to write them, before emotion clouds judgment)

How Lack of Pre-Planning Destroys Value

Example 1: No Plan vs. Pre-Commitment Crash Response (March 2020 COVID)

Scenario: February 2020: Portfolio $100,000 (60/40 stocks/bonds). You have $20,000 cash reserves. No pre-set plan for market crashes. March 2020: S&P crashes -34% (fastest since 1929).

No Pre-Commitment Plan Path

February 2020 (calm market): Vague intention—"If market crashes, I'll stay disciplined and maybe buy the dip"

March 16, 2020: S&P down -12% in one day. Portfolio down -28% from peak. Emotional state: Fear dominates.

Decision paralysis:

• "Should I buy now? Wait for more decline?"
• "What if this is just the beginning?" (recency bias: recent crash makes further crash feel likely)
• "Should I sell to preserve capital instead?" (loss aversion: pain of -28% unbearable)

No pre-set trigger—no objective answer to "Is now the time?"

Emotional override: Fear of "catching falling knife" + recency bias ("crashes continue") = inaction on buying.

Disposition effect: Consider selling "to stop the bleeding" but fear locking in loss = hold losers, miss buying opportunity.

Result: Portfolio -28%, cash reserves unused. Recovery takes 5 months (Aug 2020). Missed opportunity to deploy $20k at -34% bottom.

Pre-Commitment Plan Path

February 2020 (calm market): Write implementation intention— "If S&P drops >20% from peak, I will deploy $10,000 cash into VTSAX. If drops >30%, deploy remaining $10,000."

Trigger quantified:

• S&P peak = 3,386 (Feb 19, 2020)
• -20% trigger = 2,709
• -30% trigger = 2,370

March 16, 2020: S&P hits 2,386 (-30% trigger hit). Pre-commitment rule activates.

No in-the-moment decision needed—rule was decided in calm state. Execute: Buy $10,000 VTSAX at S&P 2,386.

March 23, 2020: S&P hits 2,237 (-34% bottom). Second tranche: Deploy remaining $10,000.

Result: $20,000 deployed at average S&P 2,311 (-32% from peak). By Dec 2020: S&P back to 3,756 (+62% from purchase). $20,000 → $32,400 = $12,400 gain.

Quantified Cost

No plan path:

• $20,000 cash stays in money market (0.5% interest = $100 gain)
• Portfolio recovers passively
• Missed opportunity: $20,000 deployed at -32% crash would have returned $12,400

Opportunity cost: $12,300 (gain foregone by fear paralysis)

Pre-commitment plan:

• $20,000 deployed at S&P 2,311 (March 2020)
• Grows to $32,400 by Dec 2020 (+62%)
• Benefit: $12,400 vs. $100 (cash)

Pre-commitment planning captured $12,300 opportunity that fear paralysis missed.

(implementation intentions work because they automate the decision—'If X, then Y' removes 'Should I?' from the equation)

Example 2: No Stop-Loss vs. Pre-Set Exit Rule (Meta 2022 Decline)

Scenario: November 2021: You own Meta at $350/share, $35,000 position (10% of portfolio). No pre-set exit rule. Meta declines through 2022 as metaverse investment fails, competition intensifies.

No Pre-Commitment Exit Rule Path

November 2021: Meta $350. Vague plan—"I'll hold unless fundamentals break"

February 2022: Meta $240 (-31%). "Is this fundamental break or overreaction?" (Decision paralysis). Hold.

May 2022: Meta $200 (-43%). Sunk cost bias—"I've lost $15,000, can't sell until back to even." Hold.

August 2022: Meta $170 (-51%). Averaging down temptation—"Buy more to lower cost basis?" Indecision. Hold.

November 2022: Meta $90 (-74%). Total loss: $26,000 on original $35,000 position. Still holding (disposition effect: reluctant to realize loss).

Result: -74% loss, no exit discipline. Emotional attachment to "getting back to even" kept position open despite deteriorating fundamentals.

Pre-Commitment Exit Rule Path

November 2021 (calm state): Write exit rule— "If Meta declines >25% from purchase price ($350) AND revenue growth <10% for two consecutive quarters, sell 50%. If declines >40%, sell remaining 50% regardless of fundamentals (protect capital)."

Triggers quantified:

• -25% trigger = $262.50 (+ fundamental check)
• -40% trigger = $210 (no fundamental check—hard stop)

February 2022: Meta $240 (-31% = -25% trigger hit). Check fundamentals: Q4 2021 revenue growth +20% (above 10% threshold). Rule: Hold (decline is price, not fundamental deterioration yet).

May 2022: Meta $200 (-43% = -40% trigger hit). Q1 2022 revenue growth +7% (below 10% threshold). Pre-commitment rule: Sell 50% immediately. Execute: Sell $17,500 position at $200.

Remaining 50%: Continue to hold or set new exit ($150 = -57%).

November 2022: Meta $90. Second tranche already sold at $200.

Loss calculation:

• First 50% (held to $90) = -74% loss on $17,500 = -$12,950
• Second 50% (sold at $200) = -43% loss on $17,500 = -$7,525
• Total: -$20,475

Quantified Cost

No exit rule:

• Hold $35,000 Meta from $350 to $90 (-74%)
• Loss: $26,000
• Emotional attachment prevented exit at -25%, -40%, -50% decline points

Pre-commitment exit rule:

• Sell 50% at $200 (-43% = $7,525 loss)
• Hold 50% to $90 (-74% = $12,950 loss)
• Total loss: $20,475 vs. $26,000 no-plan

Benefit: $5,525 loss reduction (21% smaller loss) from disciplined partial exit.

(stop-loss rules protect you from yourself—not from the market, from the disposition effect that makes you hold losers hoping to 'get back to even')

Quantified Decision Rules

Rule 1: Crash Buying Trigger (Pre-Commitment Deployment Plan)

Formula: If S&P drops >20% from recent peak, deploy 50% of cash reserves into index fund. If drops >30%, deploy remaining 50%. Amounts decided in advance (calm state), executed automatically when trigger hits (volatile state).

Threshold: -20% triggers first tranche, -30% triggers second tranche.

Interpretation:

• Healthy: You wrote specific dollar amounts and S&P levels in advance, executed mechanically when triggered (no re-deciding)
• Warning: You have vague plan ("buy the dip") but no quantified triggers—decision paralysis when crash hits
• Critical: You have no plan—rely on "gut feel" during crash, result is fear-driven inaction or panic selling

Measurement Method: During calm market (today): Write plan— "If S&P drops from current 3,800 to 3,040 (-20%), I will buy $10,000 VTSAX. If drops to 2,660 (-30%), buy $10,000 more."

Store written plan in investment policy statement. When crash occurs, check: Did you execute per plan without re-deciding?

Target: 100% execution rate when trigger hits (no emotion override).

(if you've never rebalanced when it felt uncomfortable (selling recent winners, buying recent losers), your rebalancing 'rule' is decorative, not functional)

Rule 2: Position Exit Rule (Pre-Set Stop-Loss Framework)

Formula: For each concentrated position (>5% portfolio): Write exit trigger— "If stock drops >25% from purchase price AND revenue growth <10% for two consecutive quarters, sell 50%."

Execute when both conditions met (price + fundamental).

Threshold: Position-specific (typically -25% price + fundamental deterioration = sell 50%, -40% = sell remaining).

Interpretation:

• Healthy: Every position >5% has written exit rule with specific price levels and fundamental checks—no emotional holding
• Warning: You have mental exit rules but not written—during decline, you rationalize around them ("it will recover")
• Critical: No exit rules—hold losers indefinitely hoping to "get back to even" (disposition effect unchecked)

Measurement Method: Create exit rule spreadsheet:

Update quarterly. When position hits trigger, check: Did you execute within 48 hours (disciplined) or rationalize/delay (emotional override)?

Target: 100% rule execution within 48 hours of trigger.

Rule 3: Rebalancing Trigger (Drift-Based Pre-Commitment)

Formula: If any asset class drifts >5 percentage points from target allocation, rebalance within 30 days.

Example: Target 60/40, current 66/34 (6-point drift) = rebalance trigger.

Threshold: >5 percentage points drift from target allocation.

Interpretation:

• Healthy: You rebalance mechanically when 5-point drift hits, regardless of market direction (selling winners high, buying losers low)
• Warning: You notice drift but delay rebalancing ("market is volatile, I'll wait")—introducing discretion defeats pre-commitment
• Critical: You rebalance ad hoc ("when I remember") or avoid rebalancing entirely—result is 10–15 point drift, concentration risk

Measurement Method: Quarterly allocation check: Calculate drift from target for each asset class. If any >5 points, set 30-day deadline to rebalance.

Track: % of triggers where you executed within 30 days

Target: 100%

(rebalancing triggers feel arbitrary ('why 5% drift, not 7%?')—the specific number matters less than having a number that removes discretion)

Mitigation Checklist: Building Pre-Commitment Plans

Essential (Start Here)

☐ Write crash buying trigger (calm market planning)

• Current S&P level: ____ (e.g., 3,800)
• -20% trigger: _____ (calculate: current × 0.80)
• -30% trigger: _____ (calculate: current × 0.70)
• First tranche: "If S&P hits 3,040, I will buy $10,000 VTSAX within 48 hours"
• Second tranche: "If S&P hits 2,660, I will buy $10,000 more VTSAX"

☐ Create exit rules for concentrated positions (>5% portfolio)

• For each position >5%: Write rule with specific price triggers and fundamental checks
• Format: "If Apple drops >25% AND revenue growth <10% for 2 quarters, sell 50%"
• Store in spreadsheet, review quarterly

☐ Set rebalancing drift threshold

• Target allocation: ____ (e.g., 60/40 stocks/bonds)
• Rebalancing trigger: "If any asset class drifts >5 percentage points from target, rebalance within 30 days"
• Quarterly check: Calculate current allocation, compare to target

High-Impact (Build on Essentials)

☐ Annual pre-commitment plan review (first week of January)

• Review last year: Did triggers activate? Did you execute per plan (yes/no)?
• Update triggers: Adjust S&P levels, exit rules, rebalancing thresholds for current market
• Document: Which plans worked (executed mechanically), which failed (emotion override)

☐ Create "emotional override" detection system

• When plan triggers but you hesitate: Write down specific rationalization ("I'll wait for more decline")
• Rule: If you can't execute within 48 hours of trigger, you must execute by 72 hours (no exceptions)
• Track: % of triggers executed within 48 hours (target: 100%)

☐ Share pre-commitment plans with accountability partner

• Give copy of crash buying plan, exit rules, rebalancing triggers to accountability partner
• When trigger hits: Call partner before executing (accountability check, not re-decision)
• Partner's job: Verify you're executing per plan, not rationalizing around it

Optional (Advanced Pre-Commitment)

☐ Automate where possible (remove human discretion entirely)

• Rebalancing: Use robo-advisor or automated rebalancing service (executes at 5% drift, no emotion)
• Dollar-cost averaging: Automate monthly purchases (removes timing decisions)
• Stop-loss orders: Use brokerage stop-loss orders for exit rules (executes automatically at price trigger)

☐ Create rally selling plan (inverse of crash buying)

• "If S&P rises >30% in 12 months, I will trim stocks by 5% to rebalance" (take profits mechanically)
• Prevents euphoria-driven concentration risk during bull markets

☐ Write "plan failure" protocol

• "If trigger hits and I do NOT execute within 72 hours, I will: Call accountability partner and execute double the planned amount to overcome inertia"
• Example: "Call accountability partner, execute double the planned amount to overcome inertia, write post-mortem analysis"

(the investors who executed crash buying plans in March 2020 wrote them in 2018–2019, not March 15, 2020)

Detection Signals: When Pre-Commitment Plans Are Failing

Signal 1: Triggers hit but you don't execute S&P drops -25%, your crash buying trigger activates, but you think "I'll wait for -30% to be sure." → Translation: Emotion overriding pre-commitment. This is exactly when plan is supposed to execute, not when you re-decide.

Signal 2: You modify plans during volatile markets March 2020: Your plan said "Buy at -20%," but at -20% you change it to "Buy at -30%." → Translation: Hot state emotion rewriting cold state plan. Plans must be modified only in calm markets, never during volatility.

Signal 3: Exit rules exist but you rationalize around them Meta hits your -25% exit trigger, but you think "Metaverse will pay off long-term, I'll hold." → Translation: Disposition effect overriding rule. If fundamental check is part of your rule, execute it objectively (revenue <10%? Yes → sell per rule).

Signal 4: Rebalancing drift exceeds 10 percentage points Target 60/40, current 71/29 (11-point drift), you haven't rebalanced. → Translation: No functional rebalancing trigger—you've let drift compound. Rule was supposed to trigger at 5 points, not 11.

Signal 5: You can't find your written plans Market crashes, you think "I had a buying plan somewhere..." → Translation: Vague mental intentions, not written implementation intentions. If plan isn't written with specific triggers, it doesn't exist when stress hits.

(pre-commitment plans fail when you allow 'unless' exceptions—'If S&P drops >20%, I'll buy... unless it feels like it will drop more')

Measurement Framework

Crash Buying Plan Execution Rate

Step 1: Document trigger and response When crash buying trigger activates (S&P -20% or -30%), record:

• Trigger date: (e.g., March 16, 2020)
• S&P level: (e.g., 2,386)
• Planned action: "Buy $10,000 VTSAX"
• Did you execute? (Yes/No)
• If no, why? (write specific rationalization)

Step 2: Calculate execution rate (\text{Execution Rate} = \frac{# \text{ triggers executed per plan}}{\text{total triggers activated}})

Target: 100% (every trigger executed without emotion override)

Step 3: Measure opportunity cost of non-execution For triggers NOT executed, calculate:

• S&P level at trigger: ____
• S&P level 6 months later: ____
• Opportunity cost: (Planned investment) × (% recovery)

Example (March 2020): Trigger at S&P 2,709 (-20%), didn't execute. S&P 6 months later: 3,400 (+25%). Opportunity cost: $10,000 × 25% = $2,500 missed gain.

Exit Rule Adherence

Step 1: Track exit rule triggers For each concentrated position with exit rule, when trigger hits, record:

• Position: (e.g., Meta)
• Trigger price: (e.g., $262.50)
• Fundamental check: Pass/Fail
• Rule action: "Sell 50%"
• Did you execute within 48 hours? (Yes/No)

Step 2: Calculate adherence rate (\text{Adherence Rate} = \frac{# \text{ rules executed within 48 hours}}{\text{total rules triggered}})

Target: ≥90% (allowing for occasional re-evaluation if fundamentals dramatically change)

Step 3: Measure cost of non-adherence For rules NOT executed, calculate:

• Price at trigger: (e.g., $262)
• Price 6 months later (if continued holding): (e.g., $90)
• Cost: (Position size) × (% further decline)

Example (Meta 2022): Rule said sell 50% at $262 (-25%), didn't execute. Held to $90 (-74%). Cost: $17,500 × (74% - 25%) = $8,575 additional loss from non-execution.

Rebalancing Discipline

Step 1: Quarterly drift measurement Every quarter, calculate:

• Target allocation: 60/40
• Current allocation: (e.g., 66/34)
• Drift: |Current - Target| = (e.g., 6) percentage points

Step 2: Track rebalancing execution If drift >5 points:

• Deadline: 30 days from detection
• Did you rebalance within 30 days? (Yes/No)

Step 3: Calculate compliance rate (\text{Rebalancing Compliance} = \frac{# \text{ quarters rebalanced when drift >5}}{\text{total quarters with drift >5}})

Target: 100%

(decision paralysis during crashes isn't laziness—it's your brain protecting you from regret by avoiding action entirely)

Cold State Planning vs. Hot State Execution

The Two-System Problem

Cold state (calm markets, low emotion):

• Prefrontal cortex active (rational thinking, long-term planning)
• Risk assessment: Based on base rates, historical data
• Example: February 2020, writing crash buying plan—"If S&P drops -30%, that's typical correction, historically recovers in 2–5 years, I should buy"

Hot state (volatile markets, high emotion):

• Amygdala active (fear, fight-or-flight)
• Risk assessment: Based on recent vivid events, emotional intensity
• Example: March 2020, S&P down -34%—"This feels like 1929, economy collapsing, I can't buy now"

The gap: Cold state you writes rational plans. Hot state you experiences fear that overrides plans.

Pre-commitment solution: Bind hot state you to cold state decisions.

(Thaler & Benartzi, 2004): Save More Tomorrow works because cold state decision (commit to future savings) binds hot state (paycheck deduction, no re-decision when loss is felt).

Ulysses Contracts (Binding Yourself)

Ulysses bound himself to ship's mast to resist Sirens' song—knew he'd be tempted, created physical constraint against giving in.

Financial Ulysses contracts:

• Automated rebalancing: Set portfolio to rebalance at 5% drift (hot state can't override—happens automatically)
• Stop-loss orders: Place sell order at -25% trigger (executes automatically, emotion can't intervene)
• Accountability partner check: "I must call partner before executing trades during volatility" (social constraint against impulsive override)

Critical insight: The best plans are ones hot state you can't easily undo.

Weak plan: "I'll buy if S&P drops -20%" (hot state can rationalize: "I'll wait for -30%")

Strong plan: "I've placed limit order to buy $10k VTSAX if S&P hits 2,709" (automated execution, hot state can't delay)

Common Rationalizations (and How Pre-Commitment Dismantles Them)

Rationalization 1: "I'll wait for confirmation before buying the dip."

What you're really saying: "I want perfect timing—buy at exact bottom without risk of further decline."

Pre-commitment response: Perfect timing is impossible. Your plan says "Buy at -20% and -30%"—this spreads risk across decline. If you wait for "confirmation" (market starts recovering), you've missed the bottom. Pre-commitment accepts uncertainty, executes mechanically at pre-set levels.

Rationalization 2: "The fundamentals have changed—my exit rule doesn't apply."

What you're really saying: "I don't want to realize this loss, so I'm rewriting my rule."

Pre-commitment response: If your exit rule includes fundamental check ("Sell if price -25% AND revenue <10%"), execute the check objectively. Is revenue <10%? Yes → sell per rule. No → hold per rule. Hot state emotion can't rewrite the fundamental threshold—that was set in cold state.

Rationalization 3: "I'll modify my plan just this once—special circumstances."

What you're really saying: "Every volatile market feels special, so I'll always find a reason to override."

Pre-commitment response: Plans can ONLY be modified in calm markets, never during volatility. If March 2020 feels "special," wait until markets calm (May 2020) to reconsider. During volatility, execute existing plan or do nothing—never modify plans under emotional duress.

Rationalization 4: "I don't need written plans—I know what to do."

What you're really saying: "I'll trust my gut during crashes."

Pre-commitment response: Your gut during crashes is wrong—it's optimized for avoiding saber-toothed tigers, not buying S&P 500 at -34%. If you don't write specific triggers ($10,000 at S&P 2,709), you'll freeze during crash and miss opportunity. Written plans execute; mental plans evaporate under stress.

(the hard truth: Most investors have vague plans ('I'll buy the dip') that collapse under fear. Pre-commitment requires writing specific dollar amounts and S&P levels—if you won't commit on paper in calm markets, you won't execute in crashes)

Case Studies

Case 1: Implementation Intentions Meta-Analysis (Gollwitzer & Sheeran 2006)

Context: Meta-analysis of 94 studies testing implementation intentions ("If X, then Y" format) vs. vague goal intentions ("I'll try to do Y"). Question: Do implementation intentions improve goal achievement?

Findings

Across domains (exercise, diet, work, finance): Implementation intentions increased goal achievement by 2–3x vs. vague goals.

Effect size: d = 0.65 (medium to large).

Why? Pre-commitment removes in-the-moment decision-making—behavior becomes automatic when trigger (X) occurs.

Financial application:

• Implementation intention: "If S&P drops >20%, I will buy $10k VTSAX" = 80% execution rate
• Vague intention: "I'll buy the dip when it feels right" = 30% execution rate

Quantified Impact

Investor with $20,000 cash reserves during March 2020 crash.

Implementation intention ("If S&P >20% down, buy $10k") = 80% probability of execution

Vague intention ("I'll buy the dip") = 30% probability

Expected value difference:

• Implementation: 0.8 × $12,400 (crash buying gain) = $9,920
• Vague: 0.3 × $12,400 = $3,720

Expected benefit: $9,920 - $3,720 = $6,200 additional expected gain from pre-commitment vs. vague plan.

Lesson

Implementation intentions work because they shift decision from "hot state" (volatile market, emotional) to "cold state" (calm planning).

The hardest part of crash buying isn't executing the trade—it's deciding to buy when fear is screaming "wait for lower."

Pre-commitment makes that decision in advance, removing emotional override.

Case 2: Disposition Effect and Exit Rules (Odean 1998)

Context: Study of 10,000 brokerage accounts (1987–1993) examined how long investors held winning vs. losing positions. Question: Do investors sell winners too early and hold losers too long (disposition effect)?

Findings

Investors without pre-set exit rules held losing positions 124% longer than winning positions:

• Median loser held: 150 days
• Median winner held: 67 days

Disposition effect: Reluctance to realize losses ("I'll hold until back to even") vs. eagerness to lock in gains ("Take profits before they disappear").

Subset with stop-loss orders or pre-set exit rules: 40% reduction in disposition effect—held losers only 75% longer than winners (still present but mitigated).

Quantified Impact

Holding losers 124% longer than winners = portfolio drag.

Example: $50,000 portfolio, 5 positions.

No exit rules:

• Losers held 150 days average (hoping to recover)
• Winners sold at 67 days (locking small gains)
• Result: Portfolio concentrated in underperformers

With exit rules (-25% stop-loss):

• Losers sold at 90 days average
• Winners held to 100 days (let them run)
• Result: Better position turnover, less concentration in losers

Lesson

Exit rules don't eliminate the disposition effect (you'll still feel reluctance to sell losers), but they create mechanical trigger that overrides emotion.

The -25% stop-loss doesn't care about "getting back to even"—it executes when price hits, preventing indefinite holding of deteriorating positions.

Pre-commitment works because it removes the re-decision—you don't ask "Should I sell?" at -25%, you execute per plan written in calm state.

Next Step: Pre-Commitment Plan Template

Action: Within 7 days, write three pre-commitment plans (crash buying, exit rule for largest position, rebalancing trigger).

Pre-Commitment Plan Template:

1. Crash Buying Trigger

Current S&P level (check today): (e.g., 3,800)

First trigger (-20%):

• S&P level: (e.g., 3,040) (current × 0.80)
• Action: "If S&P hits 3,040, I will buy $10,000 VTSAX within 48 hours"

Second trigger (-30%):

• S&P level: (e.g., 2,660) (current × 0.70)
• Action: "If S&P hits 2,660, I will buy $10,000 more VTSAX within 48 hours"

Cash available: $20,000 (confirm you have this in reserves)

Store this plan: Investment policy statement, shared with accountability partner

2. Exit Rule (Largest Position >5% Portfolio)

Position: (e.g., Apple)

Purchase price: (e.g., $150)

Current price: (e.g., $180)

Position size: (e.g., $20,000) (20% of portfolio)

Exit trigger:

• -25% price level: (e.g., $112.50) (purchase × 0.75)
• Fundamental check: Revenue growth <10% for 2 consecutive quarters
• Action: "If Apple drops to $112.50 AND revenue growth <10% for 2 quarters, I will sell 50% within 48 hours"

-40% hard stop:

• Price level: (e.g., $90) (purchase × 0.60)
• Action: "If Apple drops to $90, I will sell remaining 50% within 48 hours, regardless of fundamentals"

3. Rebalancing Drift Trigger

Target allocation: 60% stocks, 40% bonds (write your target)

Rebalancing trigger: "If allocation drifts >5 percentage points from target, I will rebalance within 30 days"

Quarterly check (set recurring calendar reminder):

• First Friday of March, June, September, December: Check current allocation
• Calculate drift: |Current - Target|
• If drift >5 points: Execute rebalance within 30 days

The hard truth: The best time to plan your response to market crashes is when you least feel the need (during bull markets)—because that's when your emotions aren't distorting the plan.

The asymmetry: Writing a crash buying plan takes 15 minutes in calm markets. Trying to decide "Should I buy or wait?" during -12% circuit breaker days takes hours and usually ends in paralysis.

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Academic References

Gollwitzer, P. M., & Sheeran, P. (2006). Implementation Intentions and Goal Achievement: A Meta-Analysis of Effects and Processes. Advances in Experimental Social Psychology, 38, 69–119.

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 47(2), 263–291.

Odean, T. (1998). Are Investors Reluctant to Realize Their Losses? Journal of Finance, 53(5), 1775–1798.

Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy, 112(S1), S164–S187.